As I’ve mentioned in my profile, we have a decent-sized nest egg for retirement. The million-dollar question (pun intended), is what assets should we invest in? To me, good asset allocation is the most important thing you can do to ensure long-term success. For this post, I’m not going to go into the technical details of proper asset allocation. That is a whole other discussion, which I may talk about in the future. The purpose of this post is to discuss my current allocation as well as openly discuss the allocation strategy and methods to help improve returns while reducing risk.
For those who wish to understand the technical details, I recommend reading the following books:
- The Intelligent Asset Allocator — William Bernstein
- The Four Pillars of Investing — William Bernstein
- The Investor’s Manifesto — William Bernstein
- A Random Walk Down Wall Street — Burton G. Malkiel
I will mention that good asset allocation is based upon the modern portfolio theory (or MPT for short), using indexed-based funds, buy-and-hold, and minimizing expenses. During the 2008–2009 crisis, it was said that buy-and-hold was dead. During this period pretty much all assets went down in value: stocks, bonds, commodities, sectors, regions, etc. MPT has its disadvantages and its critics.
Other investment strategies are available but the topic of another discussion. For now, it’s best to assume, while it won’t give you outstanding returns, you’ll lose less than most other professional investors during the long run. I will say our allocation is mostly index-based, where we do have a percentage (under 20%) that is actively managed by me. If you feel you can do better than the market, it’s recommended to allocate no more than 20% for active investing (i.e. picking specific stocks). This means 80% of your investments are kept to the plan of proper asset allocation and buying index-based funds.
A little background on our financials. I’m 41 years old and have 3 children (6 years, 3 years, and 25 months old). The asset allocation discussed in this post only includes our retirement accounts. It does not include any of our taxable accounts, our children’s 529 accounts, or other assets (i.e. rental property). Each has their own investment objectives and timelines, so in my opinion, they should be treated separately. As we approach retirement age (mid 50’s and early 60’s) I do plan on incorporating more of our taxable investments into our asset allocation. For now, they are separate.My asset allocation is simply meant as a guideline. What may make sense for our risk tolerance, financial objectives, and timeline might not be appropriate for you.